Money and Credit — Practice

Question 1

What is meant by 'double coincidence of wants'?

Accepted Answer

In barter, both parties must want the good the other has to offer at the same time.

✦ Answer: both sides wanting each other's goods simultaneously.

Question 2

Who issues currency notes in India?

Accepted Answer

The Reserve Bank of India, on behalf of the central government.

✦ Answer: the Reserve Bank of India (RBI).

Question 3

What is collateral?

Accepted Answer

An asset the borrower pledges to the lender until the loan is repaid; the lender can sell it on default.

✦ Answer: an asset pledged as security for a loan.

Question 4

How does money solve the problem of barter?

Accepted Answer

Step 1 — Barter needs a double coincidence of wants, which is hard to find.

Step 2 — Money acts as a medium of exchange everyone accepts, so one can sell for money and buy separately.

✦ Answer: money removes the need for a double coincidence of wants.

Question 5

How do banks earn income from deposits and loans?

Accepted Answer

Step 1 — Banks keep a small cash reserve and lend out most deposits.

Step 2 — They charge borrowers a higher interest than they pay depositors; the difference is their income.

✦ Answer: from the interest-rate difference between loans and deposits.

Question 6

Explain the two different outcomes of credit with examples.

Accepted Answer

Step 1 — Positive: a loan helps a producer fulfil an order and earn more (higher income).

Step 2 — Negative: if the venture fails (e.g. crop failure), the borrower must sell assets to repay — a debt-trap.

✦ Answer: credit can raise income or trap the borrower, depending on the outcome.

Question 7

Compare formal and informal sources of credit.

Accepted Answer

Step 1 — Formal: banks and cooperatives, supervised by the RBI, charge fair/low interest.

Step 2 — Informal: moneylenders, traders, relatives — unsupervised, often very high interest.

Step 3 — The poor rely more on costly informal credit, so formal credit should be expanded.

✦ Answer: formal is RBI-supervised and cheaper; informal is unregulated and costly.

Question 8

How do Self-Help Groups help poor rural households get credit?

Accepted Answer

Step 1 — 15–20 members save small sums regularly and lend the pool to members at low interest.

Step 2 — Without collateral, the group becomes eligible for bank loans in its name.

Step 3 — This provides cheap credit, reduces dependence on moneylenders and empowers women.

✦ Answer: they pool savings and access collateral-free bank loans, cutting reliance on moneylenders.

Question 9

State two ways the RBI supervises formal-sector lending.

Accepted Answer

Step 1 — It monitors that banks maintain the required cash reserves.

Step 2 — It ensures banks lend not just to profitable businesses but also to small borrowers, at fair rates.

✦ Answer: it checks cash reserves and monitors fair lending to all borrowers.

Practice — Money and Credit

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